It’s time to tighten regulation of Freddie Mac and Fannie Mae. To understand why, pretend for a moment that the giant mortgage-buying companies went bust.
New fixed-rate mortgages would become instantly rare. Interest rates would jump. Fewer mortgages mean fewer home-buyers, so housing prices would fall. The home refinance boom would go bust overnight, cutting off a key source of consumer cash.
All that would ripple the economy. Recession, here we’d come.
Of course, Fannie and Freddie are not going to fail. Despite the bad headlines of recent weeks, both are healthy financially. If they ever really got sick, the government would probably bail them out.
But, given their economic heft, the recent bad news at Freddie shows that both firms need a tougher watchdog.
Fannie and Freddie are privately owned companies chartered by the federal government. They buy up nearly half the mortgages in America, providing lenders with the money to make more mortgages. Fannie and Freddie then package those mortgages into bonds and sell them on the capital markets.
It wouldn’t take a failure to slow that mortgage money flow. Any serious doubt about the soundness of Fannie and Freddie would clog up the system.
The news at Freddie has been disturbing. The board just canned its top three executives for their role in an accounting brouhaha. Federal investigators are poking around.
The fact that things got this far shows a failure of regulation. Rep. Richard Baker, R-La., chairman of the subcommittee on the mortgage business, has a plan to put Fannie and Freddie on a tighter leash. He’d move regulation from the present obscure government board into the Treasury Department agency that regulates savings banks. That would insulate regulators from Congress, where Fannie and Freddie have lots of friends. Regulators would get the power to restrict growth of assets, oust officers and directors, levy fines on executives, even toss the companies into receivership.
That’s a good idea. A vigilant watchdog can reassure the mortgage markets.
At the moment, the spat at Freddie Mac doesn’t look like the sort of bald-faced lying that turned big losses into phony profits on the books of WorldCom and Enron. Instead, Freddie seems to be a case of “earnings management” gone overboard. Earnings management is a no-no. It misleads investors about the company’s actual profits.
This week’s tiff at Fannie is comparatively gnat-sized. Nobody’s saying the books were so much as warmed over, much less cooked. According to government-required accounting methods, Fannie made $4.6 billion last year. But The New York Times gave credence to analysts who say that Fannie made no money at all when viewed through another accounting prism.
Good regulation is a balancing act. Private industry is much better than government at running things. The key is to regulate just enough to preserve soundness and integrity within Fannie and Freddie, while letting private interests run the show. Given their role in the housing industry, the government should also make sure they play square with borrowers.
We have an example of good regulation in the banking industry. Wing-tipped platoons of government examiners show up about once a year at banks across the land to plow through the books. When soundness is threatened, they order bank executives to straighten up. It’s expensive and time consuming, but few banks fail, and most make a tidy profit.
It may be time to apply that approach to Fannie and Freddie.
St. Louis Post-Dispatch